Automobile Club of Michigan v. Commissioner of Internal Revenue/Dissent Harlan

Mr. Justice HARLAN, dissenting.

I think collection of the 1943 and 1944 taxes, based on the Commissioner's retroactive revocation of his 1934 and 1938 exemption rulings, was barred by the three-year statute of limitations. I would hold that the limitations period began to run when the taxpayer, relying on the exemption ruling, duly filed its Form 990 returns for the years 1943 and 1944. I see no reason why we should strain to construe 'return' in § 275(a) as excluding an information return when such a return was the only one required of this taxpayer, exempt from taxation at the time, and especially when that construction procedures the inequitable consequences which have resulted here. Section 275(a) should be construed in conjunction with § 276(a), which provides that an assessment may be made without regard to the statute of limitations in 'the case of a false or fraudulent return with intent to evade tax or of a failure to file a return * *  * .' In my judgment, a taxpayer who files a return on one form rather than another because the Commissioner directs him to do so cannot be charged with the 'failure' contemplated by the statute. See Stockstrom v. Commissioner, 88 U.S.App.D.C. 286, 190 F.2d 283, 30 A.L.R.2d 443; Balkan Nat. Ins. Co. v. Commissioner, 2 Cir., 101 F.2d 75. Commissioner of Internal Revenue v. Lane-Wells Co., 321 U.S. 219, 64 S.Ct. 511, 88 L.Ed. 684, cited by the Court, is inapposite because the taxpayer there was required by applicable statutes and regulations to file two returns and had filed only one. Compare Germantown Trust Co. v. Commissioner, 309 U.S. 304, 60 S.Ct. 566, 84 L.Ed. 770. Under the decision of the Court, the Commissioner may revoke his rulings retroactively so long as his action does not constitute an 'abuse of discretion.' I see no reason why that power should not also be subjected to the three-year limit established by Congress.

I also disagree with the Court's holding that the Commissioner may properly tax in the year of receipt the full amount of petitioner's prepaid membership dues. The Commissioner seeks to justify that course under the 'claim of right' doctrine announced in North American Oil Consolidated v. Burnet, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197. However, that doctrine, it seems to me, comes into play only in determining whether the treatment of an item of income should be influenced by the fact that the right to receive or keep it is in dispute; it does not relate to the entirely different question whether items that admittedly belong to the taxpayer may be attributed to a taxable year other than that of receipt in accordance with principles of accrual accounting. See Brown v. Helvering, 291 U.S. 193, 54 S.Ct. 356, 78 L.Ed. 725, where these two problems were involved and were treated as distinct. The collection of taxes clearly should not be made to depend on the vicissitudes of litigation with third parties in which the taxpayer may be engaged. That is quite a different thing, however, from holding that the Commissioner may force taxpayers to abandon reasonable and accurate methods of accounting simply because they do not reflect advance receipts as income in the year received. Under § 41 of the Internal Revenue Code of 1939, the income of the taxpayer is to be determined 'in accordance with the method of accounting regularly employed in keeping the (taxpayer's) books,' unless 'the method employed does not clearly reflect' the taxpayer's income. Under § 42, items of gross income need not be reported in the taxable year in which received by the taxpayer if, 'under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.' And it is clear that accrual methods of accounting may be employed. United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347. The Commissioner's own regulations authorize the deferral of income in some instances.

The Court, however, now by-passes the Commissioner's 'claim of right' argument, and rests its decision instead on the ground that the 'pro rata allocation of the membership dues in monthly amounts is purely artificial and bears no relation to the services which petitioner may in fact be called upon to render for the member,' so that it cannot say that in doing what he did the Commissioner exceeded the limits of his discretion. I do not understand this, because the Commissioner does not deny-as, indeed, he could not-that the method of accounting used by the taxpayer reflects its net earnings with considerably greater accuracy than the method he proposes. Nor does he urge that the taxpayer's accounting system defers income in a manner or to an extent that would make the Government unreasonably dependent on the continued solvency of the taxpayer's business. And no other circumstances have been shown which would justify application of the statutory exception.

On both of these grounds I would reverse the judgment below.